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Deleveraging is over; the recovery will now begin. This happy notion has been tossed around a lot lately. In the fourth quarter of 2012, U.S. consumer debt rose sequentially for the first time in four years, suggesting that Americans are feeling flush and will soon get back to spending. So the economy is set to accelerate, supporting markets.
Americans appear to be on a somewhat firmer financial footing. Household debt, which peaked at almost $13-trillion (U.S.) in 2008, has fallen to $11.4-trillion as mortgage debt has declined. As a percentage of disposable income, household debt has fallen from over 130 per cent to about 110 per cent (still high by 20th-century standards).
Everyone knows that household parsimony has been balanced by deepening public indebtedness. But there is another important set of balance sheets to consider. It is widely thought that companies are carrying little debt and have deleveraged since the crisis. Not true. Low interest rates mean that more debt can be carried at the same cost, and managements have taken advantage.
Corporate debt, excluding the financial sector, has hardly budged from its all-time high, as a percentage of gross domestic product. And it is not just freewheeling, junk-rated outfits that remain leveraged. The ratio of net debt to earnings before interest, tax, depreciation and amortization at investment-grade non-financial companies is 1.5, in line with 2009 highs and well above the 2006 and 2007 boom years, Barclays estimates.
Companies have been enjoying record profitability. But they are using it on dividends and share buybacks, which last year reached a combined level surpassed only in 2007. S&P 500 companies paid out just under 90 per cent of profit on dividends and buybacks last year, Standard & Poor's data shows. They are spending to keep per-share earnings and dividends rising. Investors are happy. But it is not easy to see how companies can accelerate the pace at which they return cash. Unlike consumers, they are as leveraged as ever.